5 Companies Re-Shaping The Face of Digital Payments

This article is part of a series on the present and future of digital payments. For the full report, click here.

Some companies straddle the definition of traditional roles in digital payment processing. American Express (NYSE: AXP) for example operates its own payment network and its own bank. When you use your AMEX, the issuer and payment network are the same company.

Other non-traditional companies are also entering the mix and having a huge impact on the industry.

I'll refer to these companies as payment enablers, and they represent the cutting edge of payment technology.

These companies are not banks, and they have no desire to be banks. Banks must deal with regulations, fraud, credit risk, and other really annoying and expensive problems.

Neither are they merchants in the traditional sense (Amazon being the obvious exception here). Google and Facebook don't charge you money to search the Internet or send a friend request. Yes, you can go to the Apple store and buy products directly, but Apple's real business is selling iPhone and iPads wholesale to merchants.

These companies are not networks either. They don't have the desire to develop technology to manage charge backs, authorizations, clearing, and settlements.

What these companies are doing is reshaping the way that consumers engage in commerce. Jim McCarthy, Executive Vice President of Strategic Partnerships and Innovation at Visa told me that, "a lot of the experiences being shaped are primarily being driven by these third parties. They are the ones writing the programmable interface, the new mobile edge for the way consumers engage in commerce."

In other words, these companies are replacing the swiping of a plastic card with new, easier methods for the consumer to initiate a transaction. They are redefining the front-end, the façade that takes the hugely complex and intimidating back end of payment processing and hides it behind a simple, fast, intuitive design that consumers love.

What about PayPal?PayPal, the payments division of eBay (NASDAQ: EBAY) , is similar to American Express in that it straddles a few of these definitions.

PayPal has some bank like qualities – it offers credit to consumers to pay later and offers deposit like products where you can keep your money in a PayPal account. It also has some enabler like qualities – there is hardly an e-commerce website online that doesn't accept PayPal as a method of payment.

But PayPal is not a payments network. It taps into the payment network of the card you have stored in their system – it could be Visa, example.

In this way, PayPal exists as a sort of platform, a bridge with qualities similar to many of the various players but without fully embracing any one role in the process.

How have these "enablers" evolved over time?

Google, Amazon, and the others first made waves when they each introduced a new product called a "digital wallet" several years ago. Consumers could store all of their credit and debit card data in these "wallets" and access them when shopping online. The theory was that if would be easier for Google, Amazon, or another company to hold your information for you, so that you wouldn't have to repeatedly type your 16 digit card number, expiration date, etc.

This concept does work in theory. PayPal has very successfully applied this framework across the Internet. Amazon's "One-Click" feature is a brilliant application of making commerce easier by storing credit card and shipping information. But beyond that, the feature largely flopped.

I don't think [digital wallets] are dead, but if you go back to what I said publicly in 2011, I didn't think these wallets met a value proposition. I'm going to tap to pay? What's the friction that it's really solving? What are the benefits that I'm getting? How is that helping me in my shopping journey? At the end of the day, the failure of wallets was not being focused enough on customer needs.

Chenault's reasoning on digital wallets defines not only that technology's shortcoming, but it also defines the future of the industry.

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Jay Jenkins has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, American Express, Apple, eBay, Facebook, Google (C shares), MasterCard, and Visa. The Motley Fool owns shares of Amazon.com, Apple, eBay, Facebook, Google (C shares), MasterCard, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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How many thousands of eBay users have the same password for PayPal that they used for eBay? Now PayPal has been asking users to change their passwords. Just to be on the safe side, eBay users should maintain a bare minimum balance in their PayPal accounts. Of course opening a second bank account and not keeping very much in the original bank account that you have associated with your PayPal account will also prevent hackers from accessing your account, (or for that matter, PayPal or eBay from yanking unwarranted refunds from that account). That's why it's so important to always transfer funds out of your PayPal account and the bank account associated with it AS QUICKLY AS POSSIBLE.

Google, Apple, Facebook and Amazon operate their payment enabling services as no more that “credit card merchant account” operators via their own retail bankers; eBay’s clunky “pretend bank” PayPal likewise is, in the main, a credit card merchant account operator but prefers to access payer’s funds, if the payer is silly enough to give them that authority, by the riskier ACH direct debit process, because it costs them less; regardless, all these operators are parasitic middlemen riding on the backs of the retail banks’ existing payment systems …

“In other words, these companies are replacing the swiping of a plastic card with new, easier methods for the consumer to initiate a transaction.”

Rubbish! Regardless, I suggest you take a look at the new digital wallet products now being offered by Mastercard (“MasterPass”) and Visa (“V.me”).

And, eBay’s “PreyPal” is nothing like Amex; Amex stands on its own two feet; “PreyPal” is simply another of the “parasites” that, in the main, ride on the back of the existing retail bank systems; “PreyPal” at physical point of sale is a joke, and a very poor one at that; next time you visit Home Depot, ask a cashier how “Pay Here With PayPal” is going–LOL …

The fact is both eBay and “PreyPal” have developed atrocious reputations; but don’t believe me, try a Google search thereon …

Forget what Amex thinks about “digital wallets”; what counts is what the two elephants in the room, MasterCard and Visa, have done. Of course, “digital wallets” are not dead; probably, “mobile” wallets are unlikely to ever replace physical cards at physical points of sale, but for online purchases “digital wallets” will ultimately prevail over having to supply card numbers, etc for every transaction; “PreyPal” is the classic example of a successful online “digital wallet”, albeit a clunky one.

Online digital wallets will undoubtedly ultimately succeed but the ones that finally come out on top with be the two logical extensions of the retail banks’ credit card systems, MasterCard’s “MasterPass” and Visa’s “V.me”; the rest of the pretenders, including the clunky “PreyPal”, will ultimately fall by the wayside; as far as Chenault’s lack of interest in a digital wallet, well, no worry, you can load your Amex onto both “MasterPass” and “V.me” …